SBA loans were originally created to fill gaps in access to capital experienced by small businesses. As it does that, SBA lending moves on a spectrum. When the economy is good, there is a dip in SBA lending, which is what’s happening now.
That, however, isn’t a bad thing, says Jim Altman, Middle Market Pennsylvania Regional Executive at Huntington Bank.
“One of the reasons SBA lending is down is because there are more options for small businesses to access capital than there have been in prior years,” he says.
SBA, however, still has a role in this economy. SBA customers are using the program as a growth tool — taking on another location, buying real estate they once leased, or acquiring another company.
Smart Business spoke with Altman about the role of SBA loans in business growth and how the lending climate in today’s economy is affecting early stage companies.
How well do companies understand SBA loan products and their applications?
SBA remains the best-kept secret in the business capital marketplace. There is lots of misinformation and urban legends about the program.
For example, companies often believe they’re not ready for bank financing. That, too, often leads to business owners bootstrapping an expansion through personal loans, credit cards, second mortgages or investments from partners rather than turning to an SBA loan.
SBA products are the most patient capital available outside of loans for real estate. They offer low interest rates, are covenant-free and come with terms small or rapidly expanding businesses need at their most vulnerable state.
Early stage companies need to focus on the first three years of operations. Too often, business owners focus solely on getting started and don’t create a working capital cushion for the ‘what ifs’ — a water pipe break, serious illness, or loss of a primary customer. SBA loans can help in this regard.
There is so much information and resources available for free to help business owners understand SBA loans and prepare their company for bank financing. There are SCORE financial education seminars hosted by the SBA that help businesses learn how to put together a business plan and create a balance sheet, both of which are critical to help small businesses prepare for and have an end-game in mind for their financing needs.
When does it make sense for a company to take advantage of an SBA loan?
SBA loans are good for early stage companies. It’s one loan that serves multiple purposes and has a good structure. Even businesses that are short on collateral and high on risk, like those that operate specialty properties such as a golf course or gas station — something that creates collateral concern for a lending institution — are good candidates for an SBA loan.
Businesses that represent a higher-than-normal risk for lenders can use SBA loans to access capital within a traditional lending relationship. That enables the bank to get to know the business and its owner, and that can lead to a traditional lending partnership over time as the bank comes to understand its risks and collateral grows.
What caution should companies take as they apply for an SBA loan?
Businesses should be careful about the equity partner they choose. Put any lender through an interview process to ensure they’re a good fit. And interview a bank the same way. A banker should align with their business client’s goals. That helps the bank, which is an SBA partner, facilitate the program and structure products to meet the business’s goals. When done right, this will set up a business for success years down the road, not just satisfy an immediate need.
Businesses should also do their research on capital options and explore each. The easiest to access isn’t always best. And don’t sign up for financing without fully understanding the terms.
There’s lots of information out there on financing to help small businesses grow and flourish. Take advantage of this to find the best financing situation.
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